Is it Downhill for Cable From Here?

After a very busy week of economic data out of the UK, the conclusion seems to be that the Pound Sterling price is due for some weakness, Particularly against the dollar in the lead-up to the Jackson Hole Symposium. Though the immediate scenario hasn’t changed all that much, markets appear to be moving in anticipation of what will happen next year.

Both the Fed and the BOE are expected to enter an extended easing cycle which could last a couple of years. The consensus among market makers for the moment appears to be that the BOE will be more aggressive with the cutting. Because it is the 2-year interest rate that is the most sensitive to rate changes, the GBP/USD outlook for 2025 is now taking a larger role.

It’s All About the Timing

The 2-year Treasury is the most popular among bond traders trying to profit on or hedge against interest rate changes. Which is why the effect of the interest rate path into next year becomes more important. Traders react to the current rate and where the rates are expected to go, which affects the Pound Sterling price over the lifetime of the bonds that are most popular in money markets.

As a consensus, traders expect the US and the BOE to ease their interest rates out of restrictive territory and back to “neutral”. Where exactly those levels are is a matter of debate among economists. But what matters for traders is how fast the respective banks are expected to ease. A faster rate of easing – even if it ends up at the same rate – generally translates into a weaker currency.(pound weakness)

The Faster Easing Path

The initial reaction to the data last week was a bit of uncertainty, as the unemployment rate dropped while the claimant count rate increased. That suggested both loosening and tightening in the labor market at the sametime. But the subsequent relatively strong GDP growth and CPI coming in below expectations seemed to reassure markets that the BOE was actually managing to thread the needle.

What policymakers are trying to do is achieve a very delicate balance between growing the economy, but not so fast that it will boil over into inflation. The recent high services CPI was what was worrying the BOE about cutting rates. But with inflation in that sector coming in well below expectations and lower than prior months, investors were finally reassured that the conditions were being met for the BOE to keep cutting rates going forward.

How Low Can They Go

The market is now pricing in two BOE rate cuts this year, with a slim majority saying the next won’t be in September, but in October. That implies the third and final cut of the year will be in December. However, analysts are expecting the rate cuts to continue through the course of next year and fall to 3.0% by the time 2025 is over.

The Fed, in contrast, is expected to cut three times this year as well. But the BOE has got the jump on easing, and already did theirs at the start of this month. After that, the Fed is expected to keep rates higher than the BOE through 2025. And that could leave traders generally favoring the dollar over the pound, putting pressure on cable and contributing to Pound weakness. Particularly if there is an upset out of Jackson Hole, and Powell doesn’t deliver on the expectations of promising to ease.

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